Monster Beverage Sees Growth Slow as Coca-Cola Deal Looms

Image: Monster Beverage.

For quite a while, investors in energy-drink pioneer Monster Beverage have looked forward to the consummation of the pending strategic partnership with Coca-Cola , with the potential to launch Monster's future growth potential into the stratosphere with the help of Coca-Cola's impressive distribution network. Yet coming into Thursday afternoon's first-quarter financial report, few Monster Beverage investors expected to see the big one-time items related to the deal, which the company hopes will close as scheduled later this quarter.

Looking beyond those figures, though, Monster didn't post the strong growth that investors have come to expect. Let's look more closely at Monster Beverage, and what's ahead for the company for the rest of 2015.

Monster Beverage needs some energyThe key to understanding Monster Beverage's financials this quarter is to figure out which figures are comparable. When you look at net sales, but take out the impact of accelerated deferred revenue stemming from the Coke transaction, growth of just 9.5% resulted in adjusted net sales of $587 million, well below the $601 million consensus among those following the stock. Similarly, adjusted earnings of $0.62 per share fell more than $0.05 short of shareholder expectations.

The impact of the Coke deal, though, was massive. Because of the replacement of Monster's existing distributors, the company had to incur termination fees of $206 million, which it included as charges against net income in the first quarter. The accelerated recognition of deferred revenue added $40 million to Monster's top line, but that figure will merely take sales away from future quarters.

Fundamentally, Monster Beverage still performed well in many areas. Case sales volume jumped another 11% year over year, to 57.8 million, and Monster saw a huge jump in per-case pricing, with $10.85 per case representing about a 5% improvement from the year-ago quarter. Gross margins climbed by 2.6 percentage points, and even rising operating expenses didn't stop operating margins from improving by nearly two percentage points.

Net income margins also rose, helping to support higher profits. Domestic sales were relatively strong, but Monster's international performance left something to be desired. Overall, net sales outside the U.S. weighed in at $113 million, down about 2% from the first quarter of 2014.

Source: Flickr user Mike Mozart.

CEO Rodney Sacks looked forward to the conclusion of the deal with Coca-Cola and its future positive effect on earnings. "We are making good progress in working through transitional issues and look forward to the closing of the transaction in the second quarter," Sacks said, and "we anticipate that this relationship will provide us with complementary product offerings in many countries as well as access to new geographies."

Where will Monster Beverage go next?Even with the distraction of the big Coca-Cola deal, Monster Beverage hasn't stopped focusing on its own business. The company launched its Monster Energy Ultra Citron and Monster Rehab Peach Tea + Energy drinks during the quarter, and Sacks said that customer response to the new products has been positive. By taking maximum advantage of the current consumer preference for still drinks compared to the sparkling beverages that Coca-Cola is famous for, Monster Beverage has put itself squarely in the sweet spot to maximum future growth potential.

At the same time, Monster Beverage has done everything it can to make the coming transition as smooth as possible. The company said that about 84% of its distribution rights within the U.S. have made the transfer to Coca-Cola's network, and the impact on Monster's retail numbers was minimal. In May, Monster Beverage hopes to get about a third of the remaining 16% transferred over to the new network.

Nevertheless, traders in Monster Beverage focused primarily on the earnings miss, with shares of the stock falling almost 3% in the first hour of after-market trading following the announcement. In the long run, it's far more important for Monster to make the most of Coca-Cola's distribution capabilities, as well as the new energy-drink brands it will acquire from the beverage giant as part of the deal. If that goes well, then a momentary move downward in the share price will soon be long forgotten.

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Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple, Coca-Cola, and Monster Beverage. The Motley Fool owns shares of Apple and Monster Beverage and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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